It is very common for business people and in-house lawyers to assume that their procedures for benefit determinations and benefit determinations on review have been vetted by counsel and are fully ERISA compliant.

Defending ERISA litigation is a reality that can be expensive and frustrating. To minimize potential headaches and costs, it is important not to inadvertently give your opponent any unnecessary advantages.

One potential pitfall involves ERISA's detailed requirements for the timing and content of benefit determination notifications and benefit determinations on review, as well as the requirements for appeals of adverse benefit determinations. Many of these requirements are found in the Department of Labor's (DOL) rules regulating disability claims procedures (29 C.F.R. § 2560.503-1).

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It is very common for business people and in-house lawyers to assume that their procedures for benefit determinations and benefit determinations on review have been vetted by counsel and are fully ERISA compliant. The same is true for the requirements applicable to appeals of adverse benefit determinations. It often comes as a surprise (and sometimes a source of embarrassment) when this is not the case.

A lack of full compliance with these ERISA requirements can have serious consequences in litigation. One of the most widely used defenses in ERISA litigation is a plaintiff's failure to exhaust his or her administrative remedies. This means that a plaintiff must follow a plan's claims and appeals process to completion before bringing a lawsuit. Also, a plaintiff cannot deviate from a plan's appeals process by engaging in other forms of self-help.

If an ERISA plaintiff fails to exhaust his or her administrative remedies, the lawsuit is subject to dismissal at a very early stage of the case. In some situations, by the time the lawsuit is dismissed, the statutory or contractual limitations period for appealing a claim has expired. When this occurs, a plaintiff cannot bring a new lawsuit because there is no longer any ability for the person to complete the plan's appeals process, which bars any future lawsuit. However, when an entity is not in full compliance with the highly technical requirements of the DOL's rules, it may lose its ability to obtain dismissal of a lawsuit based on a plaintiff's failure to exhaust administrative remedies.

This little-known exception to the exhaustion defense is known as the “deemed exhausted” rule. The “deemed exhausted” rule means that if an entity is not fully compliant, then a plaintiff's administrative remedies will be deemed to have been exhausted, even if the plaintiff never followed the plan's claims and appeals procedures to completion.

The language of the “deemed exhausted” rule requires strict, technical compliance with all the tricky requirements of the rule. Thankfully for ERISA defendants, some courts have construed the “deemed exhausted” rule narrowly and have been reluctant to find that a technical deficiency triggers the “deemed exhausted” rule. Instead, these courts have applied a “substantial compliance” standard, meaning that technical deficiency will not trigger the “deemed exhausted” rule. These courts include the Seventh, Eighth, Tenth and Eleventh Circuits. However, some courts, including the Second Circuit, have taken the position that the “deemed exhausted” rule will be triggered when there is not strict compliance.

The Department of Labor, the agency that crafted the “deemed exhausted” rule, also takes a strict compliance approach. Nevertheless, without respect to how courts address technical non-compliance, it must be remembered that in situations where a claimant is prejudiced by the absence of a fair and reasonable claims procedure, courts uniformly find that the “deemed exhausted” rule has been triggered.

The takeaway is that compliance with the claims procedures in the rule is very important and can have a significant impact on litigation. Therefore, it is critical to verify that your claims procedures are fully ERISA compliant (even if you assume that they are). You might be surprised what you find. However, in situations where there may be a lack of technical compliance with these requirements, there is a substantial body of case law supporting dismissal for failure to exhaust administrative remedies, notwithstanding the strict compliance standard set forth.

Read more:

• The evolution of ERISA and employee retirement plans
• How ERISA affects 'top-hat' compensation plans
• Compliance hurts, but ERISA & IRS penalties will hurt even worse

David Massey, a partner in Hogan Lovells' Miami office, focuses on being an advisor and business partner to clients with complex business challenges in high-stakes and bet-the-company matters.